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PayProp has released its first 2020 Rental Index with unsettling statistics.

During
March, just over 20% of tenants were in arrears, increasing to almost 24% in
April. Head of Data and Analytics, Johette Smuts says that the average size of
arrears jumped from 78% of monthly rent in March to a massive 84% in April:

“While we have already seen an increase in both the percentage of tenants in arrears and arrears as a percentage of rent in April, we expect May and June to be even worse. This position and the debt recovery process will be influenced by the pandemic, the lockdown levels and their duration.”

In addition to the PayProp rental statistics,
the company included the results of its first ‘State of the Rental Industry’
survey, conducted at the end of 2019. Smuts says it is now clear that current
financial trends already surfaced in the qualitative survey. For example,
almost 70% of survey participants reported that arrears were a bigger problem
at the end of 2019 than the previous year – and 51% had at least one tenant
evicted during 2019.

“Tenants are battling with low income growth and a high level of unemployment, which has ultimately led to affordability challenges. This is made worse by high increases in living costs, such as petrol and medical care.”

Rental growth – 2019’s outlook

From the previous PayProp Rental Index, it was speculated that there may be a rebound in rental growth later in 2020. The more likely scenario post-lockdown is that rental growth will be under continued pressure as millions of South Africans are expected to lose their jobs and to earn a lower income. However, if consumers put off buying property due to increased uncertainty and a still weaker economy, increased demand for rental properties might cushion the blow.

Q1’s rental growth

Smuts says the approach was to look at the first quarter’s monthly national rental growth rates (measured year-on-year) and compared to the same metric in the previous year. A drop was evident in each of the three months of the first quarter of 2020, effectively trending downward from December 2019. Rental growth for March measured at 2.9%, the lowest for the first quarter. Inflation measured 4.5%, 4.6% and 4.1% respectively, causing the differential between the inflation rate and rental growth rate to increase. This figure peaked at 1.4% in February.

Provincial performance

The Western Cape’s rental properties (again)
commanded the highest rents at an average of R9 171.00 but the province
experienced the second-lowest year-on-year growth at just 1.56% (after Limpopo’s
negative growth of 2.15%). The Free State returned the highest provincial
rental growth at 5.95% year-on-year, down from 8.05% the quarter before. In the
North West, tenants are still able to find the cheapest homes to rent at an
average of R5 222.00 and the quarterly growth rate of 3.8% is a long way
off the double digits (10.2%) measured just two quarters ago.

On the other hand, the Eastern Cape saw rents
increase by 5.58% in Q1 – up from 5.23% in Q4 2019. Other provinces with higher
growth rates (versus Q4 2019) were Gauteng (4.11%, up from 3.66%), KwaZulu-Natal
(3.33% up from 2.14%) and the Northern Cape (3.63%, up from 1.57%).

“There is no doubt that COVID-19 has influenced our lives, livelihoods and the industry in a way that few of us could have imagined just a few months ago. The South African rental market has been hit hard and will most likely experience subdued growth for longer than previously expected,” concludes Smuts.

The City of Cape Town has announced its adoption of rental relief options for its business lessees in recognition that lockdown circumstances are beyond their control. The relief options are aimed at softening the impact of the potential loss of business with a two-phased consumer journey put into play.

Alderman James Vos, Mayoral Committee Member for
Economic Opportunities and Asset Management comments:

“I established the Real Estate Services Task Team (RESTT) as
one of three key disaster response initiatives within EOAM to give full effect
to the COVID-19 disaster response and mitigation”.

“The rapid
onset of the COVID-19 crisis and the national government’s swift introduction
of a lockdown to contain its health impacts has undoubtedly disrupted the Cape
Town economy.”

“We will continue to partner with as many stakeholders as
possible to find innovative solutions to these difficult economic challenges.”

“This will be a difficult time for many of our companies and as a City, we also want to find ways in which we can best support those companies particularly hard hit.”

In recognition of these circumstances, the following
two-phased consumer journey has been adopted:

Phase 1: rental remission afforded to
commercial lessees based on an application made to the Property Management
Department and evaluated in terms of a proven business case by the applicant.

Phase 2: repayment arrangements afforded
to commercial lessees based on an application made to the Revenue Department
and evaluated in terms of a proven business case and aligned to existing lease
terms and conditions.

The City of Cape Town will be communication with each
lessee in due course: “I encourage all of the City’s commercial lessees who
were forced to close their businesses temporarily or permanently during the lockdown
period to respond and to apply for a rental remission, for example, a
restaurant or a tea room situated in a municipal park.”

In addition, payment arrangement options will be made
available to lessees who may fall into arrears due to the indirect impact of
the lockdown regulations, such as reduced income. Interest will not be charged,
nor debt management actions be taken for the duration of the arrangements,
provided the agreement is honored.

With home loan interest rates falling, homeowners often consider using the equity in their properties to consolidate debt and to enjoy the convenience of making only one repayment a month. Gerhard Kotze, MD of the RealNet estate agency group advises homeowners to be extremely cautious when taking this step:

“Since the country went into lockdown in
March and the economy came to an effective halt, incomes have been drastically
reduced and consumers have been looking at all sorts of ways to lower their
monthly expenditure, especially their debt repayments. And while the banks have
offered most home-owners payment holidays on their bonds, owners who have built
up equity in their homes have also been looking at the consolidation option.”

“This is not really surprising, since the
interest rates on car finance, credit cards and most other forms of credit are
still considerably higher than those charged on home loans, which have recently
reached their lowest levels in almost fifty years because of the recent Reserve
Bank cuts in response to the Covid-19 virus crisis”.

“But anyone planning this sort of consolidation needs to make sure that they first have a very solid repayment plan in place.”

The National Credit Regulator’s statistics show that there were 25.2 million credit active consumers in South Africa since the beginning of this year; 10.7 million (42.4%) of whom had ‘impaired’ credit records due to accounts being more than three months in arrears, adverse listing or debt judgments against them.

These figures also show that out of approximately 40 million debt accounts (at the start of 2020), only about 1.7 million were home loans, with most of the remainder being made up of secured loans such as car and furniture finance (3.5 million accounts); credit facilities such as bank overdrafts and credit store cards (27.1 million) and unsecured credit facilities such as personal loans (5.3 million).

“Despite the relatively small number of loans, the home-loan category accounts for almost half of the R1,96-trillion total value of all outstanding accounts, and the average amounts owed on other types of accounts are generally much smaller, so it is easy to understand why home owners might think it a good idea to absorb these amounts into their bonds and pay them off at a lower rate of interest” says Gerhard.

“The NCR figures indicate that most credit active consumers had at least two of the following types of accounts at the start of the year, and that the average owed by those with car finance was R285 000; the average owed on furniture was R12 000; the average overdraft amount was R32 000; the average credit card outstanding balance was R22 000; the average store card account outstanding balance was R3000; and the average personal loan amount owed was R42 000.”

Out of these, he says, the accounts with the highest interest rates are store cards (current average 17,75); credit cards (current average 18%) and personal loans (current average 24,75%).

“By contrast, the home loan base rate is currently only 7,25%, so home-owners who have enough equity built up in their property to immediately settle a R42 000 personal loan, a R22 000 credit card balance and a R3000 store card balance, for example, are currently looking at adding only about R530 to their monthly bond repayment if they consolidate debt in this way, compared to paying about R1800 a month for the usual installments on those debts.”

Kotzé cautions homeowners who do this that they will only gain a real advantage if they keep their remaining home loan term the same as before and, if they use some of the money they save on the other installments to pay an additional amount off their bond every month.

“They need to be careful that they don’t end up paying additional interest on their bond over the longer-term that adds up to much more than the original saving derived from paying off these debts.”

On the other hand, he says, if they
can divert at least half of what they are saving on other instalments to
increase their home-loan repayments every month, they could end up paying that
loan off much sooner than expected – and saving many thousands of Rands in
interest.

“In short, there can be significant benefits for home-owners who consolidate debt – but there are also serious potential pitfalls, and our advice to those who are considering such a move is always to first seek proper advice from their bankers or a reputable mortgage originator. In tough economic times, it is especially important not to put your home at risk by increasing your repayments to unaffordable levels.”